China’s Silver Inventories Collapse to Decade Lows as Physical Squeeze Deepens
China’s silver market is facing an increasingly severe supply crunch, even as international prices attempt to stabilize.
Key Takeaways
- SHFE silver inventories have fallen 88% from their 2021 peak.
- The market is in deep backwardation, signaling urgent demand for physical metal.
- Solar, EV, and AI sectors are driving strong structural demand.
Warehouse stockpiles linked to the Shanghai Futures Exchange (SHFE) and the Shanghai Gold Exchange have dropped to their lowest levels in more than a decade. SHFE inventories now sit near 342 tonnes – roughly 88% below their 2021 peak – highlighting how aggressively domestic supply has been drained.
Despite calmer price action in recent days, the underlying physical market in China remains extremely tight.
Deep Backwardation Signals Urgent Demand for Metal
The most striking signal of stress is the rare and extreme backwardation now visible in China’s futures curve. Front-month contracts are trading at record premiums over future deliveries – a clear sign that buyers are prioritizing immediate access to physical silver.
Such pricing structures typically emerge only during acute shortages, when deliverable supply becomes scarce and institutions compete for available inventory.
This squeeze persists even after speculative activity cooled in early February.
Why Stockpiles Have Been Hollowed Out
The inventory collapse reflects a convergence of structural forces.
Solar manufacturers have been aggressively securing silver supply ahead of the April 1 removal of export tax rebates, effectively front-loading production. Electric vehicle expansion, photovoltaic installations, and AI infrastructure demand are also absorbing large volumes. EV production alone is expected to require up to 70–75 million ounces this year.
At the same time, 2025 silver exports hit a 16-year high, with large shipments sent to London to ease global bottlenecks. That significantly drained domestic reserves before 2026 even began.
Adding to the tension, China reclassified silver as a strategic material on January 1, 2026, introducing strict export licensing requirements. The move signaled a shift toward prioritizing domestic supply for high-tech and green industries.
Retail demand has added another layer of pressure. In major hubs such as Shenzhen, physical bars are often sold out quickly, frequently at elevated premiums, as investors seek alternatives to real estate and hedge currency concerns.
The Earlier Price Crash That Shook the Market
While today’s focus is the supply squeeze, the market is still digesting the aftermath of the dramatic January sell-off.
On January 30, silver plunged more than 31% in a single session – one of the sharpest daily drops on record – falling to around $78.53 after reaching a historic $121.64 peak earlier in the month.
China’s sole silver futures fund, the UBS SDIC Silver Futures fund, hit its 10% daily limit down for five consecutive sessions and fell more than 40% from its peak before trading was halted.
Open interest on the SHFE dropped to the lowest level in over four years as leveraged traders reduced exposure ahead of the Lunar New Year.
Global Pressures Amplified Volatility
The correction was accelerated by international developments.
The nomination of hawkish Kevin Warsh as potential Federal Reserve Chair strengthened the US dollar, weighing on commodities globally. At the same time, the CME Group raised silver futures margin requirements from 11% to 15%, forcing leveraged positions to unwind.
The result was a rapid liquidation phase layered on top of already tight physical supply.
Stabilization, But Structural Tension Remains
As of February 11, prices have begun to steady. However, the physical squeeze inside China has not eased.
The combination of depleted warehouse stocks, strong industrial demand, strategic material controls, and persistent retail buying suggests that volatility could remain elevated. The January collapse may have been driven largely by forced liquidations and macro pressure – but the domestic supply imbalance tells a different story.
China’s silver market is no longer just a speculative trade. It is increasingly shaped by strategic policy, industrial demand, and structural scarcity.
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Alexander Zdravkov is a person who always looks for the logic behind things. He has more than 3 years of experience in the crypto space, where he skillfully identifies new trends in the world of digital currencies. Whether providing in-depth analysis or daily reports on all topics, his deep understanding and enthusiasm for what he does make him a valuable member of the team.
